It may not be named correctly. What we call life insurance should really be called death insurance, because that is when we get the money… well, when our beneficiary gets the money.
There are some new vehicles labeled as Life Insurance that have some “live” benefits. We will briefly explore some of these policies.
How much “death benefit” do I need?
- Are you the primary earner for the family? If you suddenly died how would your family survive? The equation is this: how much insurance would you need, if the death benefit were invested in a monthly annuity, in order to replace your monthly income?
- Do you have a mortgage and other debt? How much insurance would it take to pay everything off and leave your family free and clear? How much additional might they need to cover miscellaneous costs until they can begin earning a living?
- Are you the primary care giver/homemaker? How much “death benefit” would your family need if to pay someone to do your care giver job, if invested in a monthly annuity.
- Are you a two income family? How much to replace either or both incomes?
- How much would you need to pay any estate taxes your heirs might have?
Do our kids need insurance?
Oh, we agonize over this one, don’t we? Financial professionals disagree. How do we place a value on our children’s lives? One reason to do it is to give them a start on low cost insurance when they are young so it will cost them less when they really need it. Another reason is to have a small policy to pay funeral expenses.
Types of life insurance.
Term is the most common. Term is the lowest cost insurance but, as the name implies, exists only for a specific length of time, hence the name “term.” If you do not die before your policy “expires,” it goes away and you start over, usually at a higher rate or a lower death benefit. There is a subset of term insurance called “return of premium.” At the end of the term all of your premium payments are returned and you start over. Presumably the insurance company has “used” your money to make more money and can afford to return the premium. “Return of premium” policies usually cost more than traditional term.
Whole life differs from term in that it covers you for your “whole life.” In addition to the death benefit, it also contains an investment vehicle that pays a fixed rate of return. Because of this extra benefit, whole life costs more than term. It is also guaranteed to never go up in price.
Universal life insurance is a type of policy that gives you an incredible amount of freedom. If you don’t want to pay the same amount each month, for example, you can customize a payment plan. The power is in your hands—but you know what they say about power: it comes with a lot of responsibility. Universal life insurance is no different. Your insurance advisor will work with you to come up with a suggested payment plan, but making those payments are all up to you.
Another interesting type of universal life insurance is called cash value. As its name suggests, this type of policy creates a cash value that accrues interest and grows as you pay into the policy. This is your money, and you can borrow against it or withdraw from the account. You can also cancel the policy at any time and the account’s cash value will be returned to you.
Find an insurance professional and be sure to explore all your options.
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